Educational Articles

Dogs Of The Dow

Robert M. Greene
| July 28, 2016

The Dogs of the Dow were on their best behavior in the first half of 2016. The Dogs, which include the 10 highest yielding equities in the Dow Jones Industrial Average as of the start of 2016, advanced 13% from January 1st to June 30th. By comparison, the major stock market benchmarks struggled to make much headway, with the Dow Jones Industrial Average and the S&P 500 each edging ahead 3%, while the NASDAQ Composite fell 3%.

Of course, even slight gains are relatively encouraging after the ugly start to 2016. Over the first six weeks of the year, the Dow Jones Industrial Average declined 10%, as the prospect of interest rate hikes by the Federal Reserve, a slump in oil prices, and concerns about economic conditions in Europe and China caused the long-running bull market to stumble. However, investors quickly regained their appetite for stocks, allowing the leading benchmarks to spend much of the June quarter within striking distance of the all-time highs reached in 2015.

The strong returns provided by the Dogs of late is likely at least partly attributable to the dearth of appealing income-producing investments in other asset classes. In this environment, many investors seemed content to load up on dividend-paying blue-chips. This clearly worked to the advantage of the Dogs, as each of these stocks offered a yield of at least 3% as of the start of the year. (Similarly, utility stocks, which are not represented among the Dow industrials, were also in great demand.) The performance of the Dogs also benefited from its two holdings in the energy sector, which were boosted by the strong rebound in oil prices since mid-winter.

There was a lot of competition for best-performing Dog in the first half of 2016. In fact, all 10 of Dogs outperformed the 3% average price advance for the 30 stocks in the Dow. Top honors, though, ultimately went to telecommunications service provider Verizon (VZ - Free Verizon Stock Report). The U.S. telecom sector has been an investor favorite over this stretch, and Verizon shares were among those in greatest demand, rising 22% in price through the end of the June quarter. The search for yield was likely a key factor behind the positive sentiment. (VZ stock started the year yielding nearly 5%, the highest of all the Dows.) On the other hand, the company’s operating performance for 2016 isn’t likely to get investors terribly excited. Helped along by strong results in the wireless business, earnings rebounded strongly last year, but figure to be stuck in neutral this year. The April sale of wireline operations in three large states, the shift of wireless customers to device payment plans, and the ramping up of a new business model are among the factors that will likely be working against Verizon this year.

Meanwhile, Exxon Mobil (XOM - Free Exxon Mobil Stock Report), the world’s largest publicly traded oil company, turned in the Dog’s second best performance. In all, its share price climbed 20% during the first six months of 2016. Like our other oily canine, Chevron (CVX - Free Chevron Stock Report), the stock has gotten a boost from the rebound in commodity prices. In mid-winter, crude slumped below $30 a barrel for the first time in more than a decade, but was back above $40 by mid-April, and has been trading between $45 and $50 for most of the past two months. Even with this rally, current prices are only about equal to where they stood a year ago and are well below the $75-$100 range that prevailed earlier in the decade. This will be reflected in the company’s 2016 earnings, which are likely to decline by about a third from last year.

Elsewhere, investors also seemed to sense a bargain in Wal-Mart (WMT -Free Wal-Mart Stock Report) stock. Shares of the world’s largest retail chain slumped badly last year, but rallied 19% during the first half of 2016. In particular, the market gave high marks to the company’s April-quarter report, bidding the stock up about 10% in price on the day results were released. Earnings at the company remain under pressure, declining 5% from the prior-year period, to $0.98 per share. Still, this was $0.08 better than our expectations. Looking ahead, management still has work to do turning around this retailing behemoth, as we don’t expect to see positive year-over-year earnings comparisons until next year.

Our general take on equities is that valuations are a bit stretched at the moment. Given the lack of appealing investment alternatives to be found elsewhere, investors might struggle to find other places to put their money to work. In such a setting, high-quality, high-yield equities, such as those found in the Dogs of the Dow, remain an attractive option.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.